Corruption and country size : evidence using firm-level survey data

What sorts of conditions make some countries more prone to corruption than the others? This is an important question for understanding how corruption arises and how to combat it. The present paper attempts to answer this question by exploring the link between the size of the country and corruption. Economic theory suggests advantages and disadvantages of being a large country. Fixed costs in monitoring and punishing corrupt politicians and bureaucrats implies lower corruption in larger countries. However, congestion or administrative costs may escalate with country size. Further, greater diversity in the larger countries implies that such countries may find it harder to reach a consensus on growth-enhancing anti-corruption reforms. Thus, the corruption and country size relationship is an empirical issue. Using firm-level survey data for 135 countries, this paper finds that the level corruption experienced by the firms is positively correlated with country size. This holds for a measure of overall corruption and petty corruption that arises in availing specific government services. According to a conservative estimate, moving from a country the size of Namibia (25th percentile level in size) to a country the size of Morocco (75th percentile level) is associated with an increase in the level of overall corruption by 0.28 percentage point or about 23 percent of its mean value. The results are robust to several controls, alternative corruption measures, sample alternations, and different country size measures